Goldman Adds Yahoo To Conviction List, Sees Nearly 30% Upside

By Teresa Rivas

Shares of Yahoo (YHOO) were recently rising 1% after Goldman Sachs added the firm to its Conviction List.

In a note out today, analyst Heath Terry also raised his target price by $2 to $24. He notes that the company is taking smart capital allocation actions, which make its balance sheet assets and core businesses more valuable than the market is giving them credit for; moreover, there is still a long way to go in Yahoo’s share repurchase plan, which has been warmly received by the Street, as well as increasing clarity surrounding the company’s turnaround plan.

He also outlines how the stock price could grow as high as $35 as the company follows through on divestitures of Yahoo Japan and its remaining Alibaba stake:

Base case ($24/share)

Our base case assumes a value of the Alibaba group of around $35 bn or $15.50/share – in line with the reported value in the recently concluded deal. We believe this could undervalue Alibaba to the degree that the company’s growth continues to stay at these levels while margins continue to accelerate (Exhibits 3 and 4). We assume a multiple of 7x 2013E EBITDA to value the core business, yielding our 12-month price target of $24. The multiple is essentially in line with other ex-growth businesses in the internet sector.

Full monetization case ($32/share)

In our full monetization scenario, we assume a value for the Alibaba group of $38.5 bn, based on 8x our estimated 2012 sales for the group, which is in line with other Chinese internet names such as Baidu and Tencent. This could also prove to be conservative given the difference in growth rate of Alibaba vs. Baidu and Tencent (Exhibit 3 and 4). We value Yahoo Japan’s stake at $332/share (stock price as of November 20, 2012). Assuming that the company is able to sell the assets at these values and uses the cash raised to buy back shares (at $19/share in line with the current share price), and the core business is worth 7X 2013E EV/EBITDA, we get a value of $32/share for Yahoo!.

While traffic and user engagement in Yahoo’s core properties are still on the wane, Terry notes that during the most recent quarter, the company’s search revenues increased 11% year-over-year, its best showing in several years. “The company plans to continue to reshape search by driving distribution deals and making organic investments to grow market share.” Nonetheless, he notes that the lack of a compelling mobile platform remains an obvious problem for Yahoo, but that the company is working to correct this.

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